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Monday, November 12, 2007

Banks Agree on Super SIV

Yen Rises to 1 1/2-Year High Against Dollar on Risk Reduction: “The yen strengthened against all 16 of the most-traded currencies, rising beyond 110 per dollar for the first time in 1 1/2 years, as investors reduced holdings of higher-yielding assets bought with loans in Japan.

The currency rose as much as 4.5 percent versus the Australian dollar and 2.2 percent against the euro as speculators retreated from so-called carry trades. Investors cut holdings of riskier assets after Morgan Stanley analysts downgraded HSBC Holdings Plc because of mortgage defaults and Deutsche Bank AG estimated that losses from falling values of subprime mortgages may reach $400 billion worldwide.

“We've seen the carry trade unwind on credit-market concerns,” said Sue Trinh, a senior currency strategist in Sydney with RBC Capital Markets, the most accurate forecaster of the yen's value against the euro in the second quarter, according to data compiled by Bloomberg. “The big beneficiary at the moment is the yen.””

The unwind continues… and may have accelerated to the point of being worthy of an oversold bounce over the next few trading days.

Subprime Losses May Reach $400 Billion, Analysts Say (Update4): “Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street's largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report today by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley led more than $40 billion of writedowns of assets as record U.S. foreclosures plundered asset prices. About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note.”

I haven’t heard contained in a while…

“Deutsche Bank expects 30 percent to 40 percent of subprime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total writedowns are based on “seat-of-the-pants” estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off $60 billion to $70 billion this year, Mayo wrote. The estimate is based on known charges of $43 billion and expected additional losses of $25 billion. The report didn't include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter.

Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run to as high as 80 percent, Mayo wrote.

Estimates of losses have soared this year as defaults and foreclosures increased.”

No surprises here.

Citigroup, Banks Agree on `Super-SIV,' Person Says (Update3): “Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three largest U.S. banks, reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said yesterday.

Bankers working on the deal met at Bank of America's offices in New York on Nov. 9 and settled on a simpler plan than initially proposed last month, according to the person, who declined to be named because the agreement isn't public. Under the original initiative brokered by Treasury Secretary Henry Paulson, the fund would buy some of the $320 billion in assets held by so-called structured-investment vehicles, known as SIVs.

The banks are pushing to have the fund in place by year-end because SIVs are unable to get short-term credit to finance their higher-yielding investments as losses on subprime mortgages drive investors from all but the safest government debt. The plan still has to win the confidence of investors amid forecasts from Deutsche Bank AG analysts today that losses related to subprime mortgages may reach $400 billion worldwide.

“The whole thing is flawed,” said Graham Fisher & Co. managing director Josh Rosner, whose New York-based firm analyzes structured finance and real estate investments. “As opposed to recognizing losses, we're trying to roll those losses into the future, regardless of the sanity or safety and soundness of doing that.””

More news on the Super SIV is expected over the course of this week. Thus far, the credit and broader equity markets aren’t exactly inspired by these developments.

“The asset-backed commercial paper market has been shrinking for 13 straight weeks in the U.S. and last week declined the most in two months. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $29.5 billion, or 3.4 percent, to a seasonally adjusted $845.2 billion for the week ended Nov. 7, according to the Federal Reserve in Washington.

SIV assets have dwindled by at least $75 billion since July as the companies struggled to raise short-term debt, according to data compiled by Bloomberg. The net asset value of SIVs has fallen to 71 percent of initial capital from 102 percent in June, Moody's Investors Service said last week. Net asset value measures the difference between SIV assets and liabilities, expressed as a percentage of its capital.”

Goldman Held Bigger Share of Level 3 Assets Than Citi, Merrill: “Goldman Sachs Group Inc. held a bigger proportion of hard-to-value assets at the end of the third quarter than Citigroup Inc. and Merrill Lynch & Co., two of the firms hardest hit by subprime mortgage losses.

Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an “extraordinary” drop in its subprime holdings, investors have remained skeptical, pushing its shares down 15 percent this month in New York Stock Exchange trading.

“It's hard to believe Goldman is perfect,”said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. “Their losses might be smaller than others, but that doesn't mean they don't have a problem.””

I doubt even that their losses are smaller than others. I bet Goldman has just been better at postponing the loses than others.

$100 Oil May Mean Recession as U.S. Economy Hits `Danger Zone': “Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.

“We are in a danger zone,” says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. “It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.”

Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected U.S. growth to slow to less than 2 percent in the fourth quarter -- half the third quarter's pace. Andrew Cates, an economist at UBS AG in London, said his models suggest a 45 percent chance of a U.S. recession next year, up from 33 percent last month, as oil prices prove a “growing concern.”

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade. The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 percent from 2.5 percent, partly because of costlier crude. The economy grew 2.8 percent last year.”

In the US the signs of slowdown are starting to spread as well.

“In the U.S., the Institute for Supply Management's manufacturing index fell to a seven-month low in October as gauges of orders and production declined.”